Food and Agriculture
Organization of the
United Nations
Price Volatility in
Agricultural Markets
Evidence, impact on food security and policy responses
Recent bouts of extreme price volatility in global
agricultural markets portend rising and more frequent
threats to world food security. To reduce countries’
vulnerability, policies should improve market
functioning and equip countries to better cope with
the adverse effects of extreme volatility.
Variability and uncertainty
Volatility indicates how much and how quickly a
value changes over time, for example the price of
a commodity. While this concept may seem obvious,
a precise definition of volatility is elusive and
measurement prone to subjectivity. In economic
theory, volatility connotes two principal concepts:
variability and uncertainty; the former describing
overall movement and the latter referring to
movement that is unpredictable.
Price fluctuations are both a normal attribute
and a necessary requisite for competitive market
functioning. The essence of the price system is
that when a commodity becomes scarce its price
rises which induces a fall in consumption and more
investment in the production of that commodity.
However, the efficiency of the price system begins to
break down when price movements are increasingly
uncertain and subject to extreme swings over an
extended period of time.
Figure 1: Implied price volatility of selected
staple foods (in %)
40
35
30
25
20
Economic and Social Perspectives – Policy Brief No. 12 © FAO 2010
15
10
1985 1990 1995 2000 2005
Soybeans Maize
Wheat
Source: FAO (2010)
Note: Implied volatility represents the market’s expectation of
how much the price of a commodity might move in the future.
This Policy Brief was produced by the Economic and Social Development Department of the Food and Agriculture Organization of the United Nations (FAO).
The opinions expressed therein do not necessarily reflect those of the FAO or its member countries. Readers are encouraged to quote or reproduce
material from this Policy Brief. In return, FAO requests due acknowledgement and a copy of the publication.
Economic and
Social Perspectives
December 2010
Policy
Brief 12
●● Volatility in agricultural markets seems to have
increased
●● Extreme price movements of agricultural
commodities pose a threat to world food
security
●● Policy measures should improve market
functioning and increase countries’ resilience
to shocks
Historically, bouts of such extreme volatility in
agricultural commodity markets have been rare.
To draw the analogy with natural disasters, they
typically have a low probability of occurrence but
bring with them extremely high risks and potential
costs to society.
Global food system vulnerable
There is emerging consensus that the global food
system is becoming more vulnerable and susceptible
to episodes of extreme price volatility (Figure 1).
As markets are increasingly integrated in the world
economy shocks in the international arena can now
transpire and propagate to domestic markets much
quicker than before.
Increased vulnerability is being triggered by an
apparent increase in extreme weather events and a
dependence on new exporting zones, where harvest
outcomes are prone to weather vagaries; a greater
reliance on international trade to meet food needs
at the expense of stock holding; a growing demand
for food commodities from other sectors, especially
energy; and a faster transmission of macroeconomic
factors onto commodity markets, including exchange
rate volatility and monetary policy shifts, such as
changing interest rate regimes.
What is more, financial firms are progressively
investing in commodity derivatives as a portfolio
hedge since returns in the commodity sector seem
uncorrelated with returns to other assets. While this
‘financialisation of commodities’ is generally not
viewed as the source of price turbulence, evidence
suggests that trading in futures markets may have
amplified volatility in the short term.
2010 Low income countries suffer most
Extreme price volatility comes at a cost, since
market actors will have difficulty planning ahead
and adjusting to the fluctuating market signals. As
unpredictable changes, or “shocks”, surpass a certain
 Food and Agriculture
Organization of the
United Nations
critical size and persist at those levels, traditional
policy prescriptions and coping mechanisms are likely
to fail.
Episodes of extreme volatility—especially large,
unexpected price upswings—are a major threat to
food security in developing countries. Their impact
falls heaviest on the poor, who may spend as much
as 70 percent of their income on food. The lack of
dietary diversification aggravates the problem,
as price increases in one staple cannot easily be
compensated by switching to other foods.
As for farmers who are highly dependent on
commodities for their livelihoods, extreme volatility
can result in large income fluctuations for which
they have little or no recourse, such as savings and
insurance. The delay between production decisions
and actual production creates additional risks, as
farmers base their investment and planning on
expected future prices.
Coherence and coordination are key
In past episodes of extreme volatility, policy
interventions have frequently failed, since budgetary
constraints and the sheer scale of price increases
have generally precluded any meaningful success at
stabilisation. Accordingly, interventions have been
short term, limited to the micro level such as targeted
consumer subsidies and safety net programmes, or
even counterproductive, such as export restrictions
which compounded uncertainty and undermined the
role of trade. Many countries also tried to use food
reserves to buffer volatility, but these have proven
unmanageable, costly and ineffectual, especially if
shocks lasted for extended periods of time.
Other publications in this series can be found online at http://www.fao.org/economic/es-policybriefs.
For questions or comments please contact ES-Policy-Briefs@fao.org or write to: Economic and Social Development Department, Food and Agriculture
Organization of the United Nations (FAO), Viale delle Terme di Caracalla, 00153 Rome, Italy.
Economic and
Social Perspectives
December 2010
Policy
Brief 12
Instead of engaging in isolated measures, authorities
should seek better coherence and coordination in
their policy responses. These must yield both greater
assurances of unimpeded access to global supplies,
and improved confidence and transparency in market
functioning, especially in the major commodity
exchanges. An improved public global surveillance
system on export availabilities and import demands
would help temper uncertainty and enable countries
to equip themselves better before the full impacts
of crises transpire. Such measures would also help
stabilise the market.
In addition, more reforms of existing instruments,
such as the Compensatory Financing Facility and
the Exogenous Shock Facility of the International
Monetary Fund, could help vulnerable countries cope
during times of crisis by providing global safety nets.
These instruments need to act ex ante by providing
import financing or guarantees with minimal or no
conditionality to alleviate the burden of credit and
foreign exchange constraints, which have afflicted
countries’ ability to meet food needs in past crises.
Safety nets at the international level are not the
only option. Countries themselves need to explore or
reinforce measures to protect the most vulnerable,
including through emergency food reserves. Such
reserves should not try to fight volatility, but to
mitigate its consequences by providing poor people
direct access to food. In the long run, countries
can lower their vulnerability by raising agricultural
productivity for a diverse set of crops that proves both
competitive and sustainable, as well as by promoting
dietary diversification.
Further information
•• Price Volatility and Crises in Global Food Markets
(preliminary title), FAO, forthcoming in 2011
•• FAO Food Outlook, November 2010
www.fao.org/giews/english/fo
•• World Food Situation Portal
www.fao.org/worldfoodsituation
For questions or inquiries, please contact Adam Prakash of
FAO’s Trade and Markets Division: ES-Policy-Briefs@fao.org.